The Japanese Yen (JPY) has been rising against a weaker US Dollar (USD), hitting a almost three-week high during the early European market on Friday. This increase was supported by expectations that the Bank of Japan (BoJ) will soon raise interest rates, following remarks from Governor Kazuo Ueda. However, Japan’s Household Spending fell by 2.9% year-on-year in October 2025. Yields on Japanese government bonds (JGB) rose as investors anticipated tightening policies from the BoJ, alongside efforts by Prime Minister Sanae Takaichi, which helped the JPY. The USD remained weak, influenced by expectations of a dovish Federal Reserve. Traders are now looking towards upcoming US inflation data for guidance.

Key Technical Levels And Economic Indicators

Despite strong US job market data, the USD struggled as traders expected another rate cut from the Federal Reserve. Technical signals indicate a bearish outlook for the USD/JPY pair, with potential support near mid-154.00s. On the upside, the pair faces resistance around the 155.40 level. The upcoming Core Personal Consumption Expenditures (PCE) report, which the Federal Reserve views as its key inflation measure, may greatly affect the USD’s direction. A high PCE reading would strengthen the USD, while a low reading might weaken it, shaping market expectations for the Fed’s rate decisions. The Japanese Yen is clearly strengthening against the weaker US Dollar, driving the USD/JPY pair to multi-week lows. This change is due to a fundamental shift in central bank policy expectations. Traders should note that breaking below the 155.00 level is technically important. The market is currently pricing in a nearly 85% chance of a rate hike at the Bank of Japan’s meeting on December 19. This follows surprising Tokyo Core CPI data for November 2025, which showed a 2.8% increase, surprising analysts and confirming a hawkish stance from the BoJ. This policy difference is a major factor in the Yen’s strength.

Market Expectations And The Unwinding Carry Trade

Meanwhile, expectations for another Federal Reserve rate cut next week are solidifying. The CME FedWatch Tool suggests a 92% chance of a 25-basis-point cut, reflecting ongoing worries about a slowing US economy. This contrasts sharply with the BoJ, making the Yen more favorable. This policy change is leading to the unwinding of the carry trade, where investors had borrowed low-cost Yen to buy higher-yielding US assets. We are witnessing these positions closing, which means selling dollars and buying yen. This process can speed up quickly, much like the sudden moves during the volatility spikes of 2024. In the coming weeks, buying put options on the USD/JPY could be a smart way to prepare for further declines. This strategy allows for a defined-risk approach to benefit from a falling exchange rate. Given the significant US inflation data arriving soon, using options may be wiser than holding a short futures position during this time. The upcoming US PCE Price Index is the key event to watch. A lower-than-expected inflation figure will likely confirm the Fed’s dovish approach and could lead to the USD/JPY pair dropping below the 154.00 support level. On the other hand, a surprising increase could trigger a brief but intense rally back towards 156.00. Create your live VT Markets account and start trading now.

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